Fitch Warns of Political Instability, Rising Debt After Israeli Election
Translated & summarized from Kikar HaShabbat by baba
Credit rating agency Fitch warned that Israel faces prolonged political uncertainty and paralysis after the recent elections, potentially leading to new elections in April. The agency forecasts that operating without an approved budget will significantly limit expenditures, and the government debt-to-GDP ratio is expected to rise. Fitch previously downgraded Israel's rating in 2024 due to the war and geopolitical risks.
The story in 5 lines · by baba
- Fitch warns of prolonged political uncertainty and paralysis in Israel following recent elections.
- The agency forecasts potential Knesset dissolution in January and new elections in April.
- Operating without an approved budget will significantly limit Israeli government expenditures.
- Fitch expects the government debt-to-GDP ratio to continue its moderate rise.
- Israel's credit rating remains 'A' with a negative outlook, according to Fitch.
Credit rating agency Fitch has warned of prolonged political uncertainty and paralysis in Israel following the recent election results, which left both major blocs without a clear parliamentary majority. The agency stated that a lengthy period under a caretaker government will hinder efforts to reduce public debt. Fitch noted that the political fragmentation and the possibility of a minority government align with Israel's current 'A' credit rating with a negative outlook.
Fitch estimates a high likelihood that a stable coalition with 61 seats will not be formed. If coalition talks fail, the Knesset (parliament) could be dissolved, leading to new elections within 90 days, with the outgoing government continuing as a caretaker administration. While a broad coalition is possible, Fitch considers it a less likely scenario. The agency's central forecast is the dissolution of the Knesset in early January, triggering elections in early April, potentially leading to a period of unstable coalitions and caretaker governments similar to 2019-2022.
The primary economic consequence highlighted is operating without an approved budget. Fitch anticipates that a new budget will not pass before new elections, and the existing budget mechanism will significantly limit expenditures. If the 2027 budget is not approved, monthly spending will be capped at 699 billion shekels, adjusted for population growth. While this might reduce the fiscal deficit in the short term, Fitch cautioned that it reflects political paralysis rather than sustainable fiscal measures, and the government debt-to-GDP ratio is expected to continue a moderate rise, remaining a key factor for the negative outlook.
Fitch previously downgraded Israel's credit rating from 'A+' to 'A' with a negative outlook in 2024, citing the ongoing war in Gaza, increased geopolitical risks, and multi-front military operations. The current statement does not include a further downgrade but adds political uncertainty to the economic challenges. In contrast, S&P Global Ratings affirmed Israel's 'A' rating with a stable outlook in May, citing economic resilience during the war.
